Gold Holders - Be Patient

"The major breakout will occur this year, though not within the time expectations of the gold bugs."

In the wake of the Fed's announced record monetization, some gold bugs remarked about the significance of the date and decision. Fed policy of currency debasement and inflation of the money supply is hardly anything new. News is important in that it highlights and reinforces trends. It doesn't create them.

Keen market watchers and seasoned Fed observers were hardly surprised at the Fed action. We all knew it was coming. The question was when. Commodities had been forming a bottom for five months. Just two weeks prior we wrote about our positive near term view on commodities. How about Gold? It rose from trough to peak over 40% in just four months.

Reflation isn't always so advantageous for the precious metals, especially gold. That holds true for both the economy and markets. With stocks and commodities now recovering, money is to be put to work in those markets and also potentially diverted away from gold. We aren't expecting a full-blown correction in gold but rather a consolidation that, for a matter of time diverts attention (like an idling engine) away from itself as it prepares for major liftoff.

This is a temporary respite in a bear market and in an economy stuck in deflation. This bout of deflation isn't even one year old yet. In other words, don't expect commodities to enter a cyclical bull market anytime soon. There isn't enough demand on the horizon. The recession and accompanying deflation should last into 2010. It may be a while before both run their course, thereby allowing an inflationary recovery to begin in earnest.

Be aware that the current rebound in stocks and commodities, though large, is just a temporary recovery. Holders of gold and gold shares should be patient. The major breakout will occur this year, though not within the time expectations of the gold bugs.